Tuesday, July 30, 2019

C&D to competitor's clients can be "commercial advertising & promotion"

Matonis v. Care Holdings Gp., L.L.C., No. 19-cv-20247-UU, 2019 WL 3386378 (S.D. Fla. Jul. 25, 2019)

The defendant Care Companies engage in healthcare management consulting, “advising healthcare providers on, inter alia, patient intake strategies and revenue management.”  Plaintiff Matonis is a healthcare management consultant who provided consulting services to the Care Companies pursuant to a consulting agreement with a confidentiality provision and a non-solicitation provision with respect to the Care Companies’ employees, consultants, and agents. In 2016, while still employed with the Care companies, Matonis founded her own consulting company (Caliber) to help health care providers track their revenue. Defendants allegedly explicitly authorized her work with Caliber (apparently after the fact of founding). The Care Companies then offered Matonis a W-2 employment contract, which she declined because the proposal contained a two-year non-competition restriction and would have required her to shut down Caliber.  The Care Companies transitioned her clients to other Care employees and officially terminated the relationship.

During the winding down period and after, Matonis expanded the healthcare consulting services provided by Caliber into patient intake and revenue management, leading to direct competition with her former employer. Defendants allegedly informed a number of Matnois’s Care clients that she was still affiliated with the Care Companies but was unable to work because she was suffering from ongoing health issues and had requested time off. She allegedly found this out after clients reached out to her to check on her health. After one such call, the client contacted Care employees, expressing his dissatisfaction with their dishonesty. Quirk, an employee, assured the client that at Matonis would continue to work with the Care Companies indefinitely and was still available to be his point person, despite the fact that Matonis had been terminated almost a month prior.

After numerous clients terminated their relationships with the Care Companies, in-house counsel allegedly sent cease and desist letters to Matonis’s Care clients and to Matonis directly. The letters asserted that Matonis was still subject to “broad confidentiality and non-solicitation provisions” in her Consulting Agreement and threatened legal action if Matonis continued to solicit Care clients and/or if those clients sought Matonis’ services. In addition, the Care Companies allegedly created an “out of office” auto-response message on Mantonis’ former email account at Care, allegedly creating the false impression that she remained affiliated with the Care Companies and tainting her reputation as a professional who promptly returns her client’s messages.

Finally, Matonis alleged that defendant CareOptimize’s website falsely advertises that it serves over twenty thousand healthcare providers nationwide, when in fact it serves closer to five thousand healthcare providers at any given time. The website allegedly misrepresents its client base, listing two clients even after both companies terminated their relationship with CareOptimize.

Matonis sued for false advertising/unfair competition under state and federal law, defamation, tortious interference, and declaratory judgment that she wasn’t barred from working with the Care Companies’ current, former, or prospective clients.

False advertising: defendants argued that its C&D letters weren’t commercial speech or advertising for purposes of the Lanham Act and the allegedly false statements on Defendants’ website didn’t directly disparage Matonis; neither argument succeeded.

Under the Gordon & Breach test (which, as a reminder, has a prong requiring “commercial competition” that doesn’t survive Lexmark, though that doesn’t matter here), these particular C&Ds were commercial speech.  “Commercial speech encompasses not merely direct invitations to trade, but also communications designed to advance business interests ....” Matonis alleged that defendants utilized the cease and desist letters as a tool to disparage her as someone who ignores contractual obligations. Defendants allegedly stood to profit from them because Matonis’ consulting company was now in direct competition with them and the clients to whom the letters were sent were former Care clients who were interested in Matonis’ services.  This sufficed to avoid dismissal.

As for the website statements, disparagement isn’t required for false advertising.  If the argument was that Matonis failed to allege injury, it was enough to allege that the parties were direct competitors and that defendants falsely represent the number of clients they represent and the scope of the representation at this tage.

Defamation per se: allegations that defendants falsely represented that (1) Matonis was suffering from an ongoing health problem that affected her ability to work on their accounts; (2) she is in violation of a non-solicitation agreement by working with the Care Companies’ former clients; and (3) continued work with her would expose them to legal liability sufficed to allege defamation per se, which in Florida covers falsehods that are injurious to the target’s trade and professional reputation.

California SCt rejects record-keeping ascertainability requirement

Noel v. Thrifty Payless, Inc., --- P.3d ----, 2019 WL 3403895, S246490 (Cal. Jul. 29, 2019)

Noel brought a putative class action on behalf of retail purchasers of an inflatable outdoor pool sold in packaging that allegedly misled buyers about the pool’s size, asserting the usual California claims (UCL, FAL, CLRA). The district court found that the proposed class wasn’t ascertainable, and the court of appeals agreed. Here, the California Supreme Court rejects an ascertainability requirement that would require good written records, either from the seller or the purchasers, of purchases.  The proposed class definition here was sufficiently ascertainable, in that it defined the class “in terms of objective characteristics and common transactional facts” that make “the ultimate identification of class members possible when that identification becomes necessary.”  This standard was satisfied here, where the class definition would allow class members to self-identify.

The facts: the package image indicates that the pool can handily accommodate several adults when inflated and filled:
A pool holding five people with plenty of room between them

Here’s the actual pool, as inflated and filled:
a pool that holds three children

Rite Aid sold over 20 thousand of these pools in California during the class period (nearly 2500 were returned), making nearly $950,000 in revenue.

The court surveyed its own decisions, those of the California courts, and federal courts on ascertainability to derive its standard.  In general, the concerns for proper definition and identification of class members are well addressed by the usual certification standards, which consider both the costs and benefits of the class action device, while ascertainability pulls a few considerations out into a vacuum.  So, for example, the court of appeals here worried that “[i]f the identities of absent class members cannot be ascertained, … it is unfair to bind them by the judicial proceeding.” But certification of a class requires the provision of the best practicable notice; due process doesn’t invariably require individual notice to absent class members. A heightened ascertainability requirement demanding the ability to provide individual notice would be “pyrrhic,” since it conflicts with the point of class actions for aggregating low-value claims. Nor is a heightened ascertainability requirement “necessary to protect the due process interests of class action defendants by protecting them from bogus claims and disproportionate liability.… There is no suggestion that, if the plaintiff class ultimately prevails, Rite Aid will face any onslaught of spurious claims, much less a bevy that could not be weeded out through a competent claims administration process. Also, because it is known how many pools were sold and not returned, and how much in revenue Rite Aid earned from these sales, the overall body of claims has a functional ceiling that further marginalizes any prospect of exaggerated liability.”

Using objective facts (rather than class members’ subjective states of mind) to define the class thus makes it ascertainable.  This puts members of the class on sufficient notice, and supplies “a concrete basis for determining who will and will not be bound by (or benefit from) any judgment,” making res judicata determinations possible.   The court also pointed out that “premising ascertainability on the existence of official records capable of being used to identify class members might, in some situations, incentivize potential class action defendants to destroy or refuse to maintain useful records that could provide a basis for class treatment.”

The appropriate form of notice to satisfy due process could be worked out as part of the broader certification process/assessment of manageability. “[G]iven the modest amount at stake (the pool having retailed for $59.99), the odds that any class member will bring a duplicative individual action in the future are effectively zero. Thus the true choice in this case is not between a single class action challenging the packaging of the Ready Set Pool and multiple individual actions pressing similar claims; it is between a class action and no lawsuits being brought at all. Under the circumstances, due process may not demand personal notice to individual class members, and to build a contrary assumption into the ascertainability requirement would be a mistake.”

Thus, the trial court abused its discretion when it determined that the class proposed by plaintiff wasn’t ascertainable. The proposed definition, “All persons who purchased the Ready Set Pool at a Rite Aid store located in California within the four years preceding the date of the filing of this action,” was neither vague nor subjective.

Tuesday, July 23, 2019

Amicus brief in Smith v. Drake fair use case

With the able assistance of UCI's IP clinic, led by Jack Lerner, I worked on an amicus brief in this case arguing that fair use should continue to be a flexible standard that accommodates various types of transformativeness. The brief is here.

Ornamental use of pun is aesthetically functional (defendant-side functionality in the wild!)

LTTB LLC v. Redbubble, Inc., No.  18-cv-00509-RS (N.D. Cal. Jul. 12, 2019)

Defendant-side functionality! This is a concept I’ve been arguing exists for years (see, e.g., the result in Louboutin v. YSL), and now it is no longer immanent in the caselaw but fully arrived!

Here, it serves another way to protect noncommercial speech despite the Honey Badger case:

while a source-identifying trademark may embody a pun, no one can claim exclusive rights to use the pun merely by printing it on t-shirts, other ‘[w]earable garments and clothing,” “[p]aper for wrapping and packaging,” or “tote bags,” or similar products and calling it a “trademark.” Even if a trademark embodying a pun is otherwise enforceable where there is a likelihood of source confusion, the trademark holder cannot prevent others from using the pun in contexts that do not imply source.

Plaintiff’s applications to register “LETTUCE TURNIP THE BEET” were initially rejected as decorative/ornamental when they showed the phrase “emblazoned” on products, but allowed after it submitted specimens using on product labels and hang tabs—the application was rejected when plaintiff first suggested the phrase merely would be emblazoned across those products. The registrations became incontestable.  Although the court didn’t apply file wrapper estoppel, it did use the PTO’s reasoning to bolster its conclusion that plaintiff’s enforceable marks didn’t entitle it to preclude others from making the joke on t-shirts or elsewhere.

Anyway, defendant lets artists upload designs to be printed on products such as apparel, phone cases, stickers, bags, wall art and so on.  Products featuring the phrase “Lettuce Turnip the Beet” or similar phrases allegedly have been offered for sale on the Redbubble site.  Its no-secondary-liability argument might otherwise have created a triable issue of fact, the aesthetic functionality of the phrase when used as a phrase demanded summary judgment for Redbubble.

Redbubble’s defense was either about the rule that “decorative or ornamental” features are not subject to trademark protection or about the exclusion for “aesthetic functionality.” “Case law has not always clearly distinguished between the two concepts, which undoubtedly are related and overlap.” However characterized, it succeeded.  Despite Au-tomotive Gold, aesthetic functionality still exists in the 9th Circuit, and here no reasonable trier of fact “could conclude that consumers seek to purchase products based on LTTB’s reputation—whether ‘genuine’ LTTB products or those produced by any competitors. Rather, as LTTB’s evidence and argument make clear, consumers are interested in purchasing products displaying the pun.”  [So this isn’t completely limited to defendant-side functionality. To the extent that LTTB’s claimed rights are based on exclusive use of the pun as the decoration for clothes, de facto secondary meaning can’t protect that. Although the term isn’t generic, declaring it aesthetically functional produces the same result for what could in other circumstances (if used on clothes tags) be an arbitrary designation.]
Screenshot from plaintiff's Etsy store, showing P's own variable, ornamental uses
LTTB argued that this argument “would permit a t-shirt bearing a copy or near copy of the Nike swoosh logo or some other registered design mark,” so the fact of ornamentation can’t produce functionality. But there’s a key difference: “Nike, Volkswagen, and Audi all developed their trademark rights by selling goods under those brand names, and have at least arguably gained brand loyalty for those products, as opposed to mere consumer interest in the specific names, independent of the reputation the companies developed when selling the products.”  International Order of Job’s Daughters v. Lindeburg & Co., 633 F.2d 912 (9th Cir. 1980), also supported Redbubble.  And Redbubble’s case was stronger because LTTB wasn’t a group with which consumers could express allegiance by buying products displaying the pun. “The products are simply the vehicle for distributing the claimed ‘trademark,’ rather than the other way around, where a trademark is used to identify the source of the goods.”  Using an already-established mark to sell t-shirts would have been a different case.

None of this was to say that LTTB’s registered marks were “per se” invalid (though it sure sounds like a holding of limited secondary meaning).  [Side note: secondary meaning isn’t necessary for an arbitrary mark, though one might reasonably argue that should change if secondary meaning failed to develop over a long time despite the theoretical arbitrariness of the term.  But what ornamentality/decorativeness really does is provide a way to manage the presumptive source-indicating function of arbitrary/fanciful symbols: in fact there are lots of ways to use many such signals that don’t almost automatically signal trademark function.  Ornamentality is our way of managing that reality for supposedly “inherently distinctive” words or designs.]  Rather, the decorativeness of the use prevented LTTB from showing a likelihood of confusion as to source, “where the mere use of the pun on the face of various products cannot be source-identifying.”  “LTTB may not … recover for alleged trademark infringement based on any competitors’ use of the very kind of designs that the PTO found not to be eligible for trademark protection.”  As in Job’s Daughters, a use could be confusing if it led consumers to assume source/sponsorship, but there was no sufficient evidence “that any purchaser of allegedly infringing items inferred from use of the pun that the product was produced, sponsored, or endorsed by any particular person or entity, such as LTTB.”

Incontestability didn’t matter because this wasn’t a finding of invalidity of the marks, but a limit on the scope of LTTB’s rights, and because incontestability doesn’t bar a functionality challenge.

Duck, duck, noninfringement: TM and (c) claims over distinct duck designs fail

Great American Duck Races Inc. v. Kangaroo Mf’g Inc., No. CV-17-00212-PHX-ROS (D. Ariz. Jul. 19, 2019)

Despite some bad reasoning equating intent to compete with (relevant) intent to confuse, the court rejects bad copyright and trademark claims based on the copying of the idea of an inflatable duck wearing sunglasses.  GAME’s duck was designed “from scratch,” but was similar to Sesame Street’s Rubber Ducky, except with sunglasses. GAME has a trademark registration for an image of the duck for various goods, and a copyright registration for the inflatable itself.  Defendant Ligeri and his companies “would identify successful products on Amazon and then make slightly different versions of those products without apparent concern about possible intellectual property violations.”  Nonetheless, defendants did use a designer, and the design wasn’t a slavish copy.  Setting aside size variations and the functional ring (D) v. flat flotation surface (P), Kangaroo’s version had a closed orange bill, not an open red bill, and its wings and tail were drawn on instead of inflatable. Like GAME’s duck, Kangaroo’s duck has a small crest on its head and is wearing sunglasses, but Kangaroo’s duck’s sunglasses weren’t completely black or inflatable, and they didn’t have a double bridge like GAME’s.
Derby Duck box

Derby Duck

Registered design mark

Kangaroo duck box

Kangaroo duck

Copyright: there was copying, but not unlawful appropriation. Under Satava v. Lowry, copyright can’t “prevent others from depicting yellow ducks, with a bill, wings, a tail, and a crest on the head. All of those attributes are found on ducks in nature.” In addition, the general design and color of an inflatable rubber duck was a “stock or standard feature[].” The sunglasses were the key protectable element of the Derby Duck, but didn’t extend to the idea of a duck wearing sunglasses, only to the particular expression. As a result, the court had to figure out “whether the two expressions of the sunglasses-on-a-duck idea are so similar that ‘the ordinary observer, unless he set out to detect the disparities, would be disposed to overlook them.’” They would not; instead, there were “a few striking differences,” including differences in the bridge, the color, and the sculptural features (inflatable versus painted on).  GAME could thus not pass the extrinsic test for similarity in protected expression; even if it could, the ducks lacked substantial similarity in total concept and feel and thus GAME couldn’t satisfy the intrinsic test.

Trademark: sloppier analysis, which is perhaps understandable given the conclusion of no liability, but the court doesn’t delineate what is actually protectable about Kangaroo’s marks and thus proceeds as if its registration might give it trade dress protection for the overall shape of the ducks, without requiring it to show either nonfunctionality or secondary meaning of the trade dress (as opposed to the registered specific image). This is a classic example of abusing a registration beyond its scope, because the US has a bad concept of the appropriate scope of a registration.  A registration for a specific two-dimensional image of a product shouldn’t be equated to trade dress rights in the product itself.  The cases tend to reject liability when fully litigated—there’s the Mardi Gras bead dog case and the Rock + Roll Hall of Fame case, for example—but this case went through summary judgment, and that’s a waste of resources and a deterrent to legitimate competition.

Anyhow, the issue was “whether a reasonable consumer seeing Kangaroo’s marks would mistakenly conclude GAME had some association with that product,” and the court cites but neither explicitly endorses nor rejects GAME’s argument that Kangaroo’s “marks” were pictures of Kangaroo’s own duck and the duck itself.  Too bad.

Conceptual strength: the court does get that there’s a problem here.  It focuses on the registered image of the duck, deeming it “descriptive” or “generic.” “The trademarks are just stylized versions of the underlying products. A consumer does not need to exercise any imagination to associate the mark with GAME’s products.” There was “relatively little” conceptual strength, and the evidence of secondary meaning was limited to use of the marks in advertising and substantial sales, resulting in “limited” commercial strength.  Overall favored Kangaroo.

Relatedness of goods: neutral, because much depends on what the Amazon listings for the products said, as in Network Automation, but GAME didn’t preserve or submit the listings. The boxes clearly identified each company, but “there is insufficient evidence to determine whether the manner in which the products were presented or advertised would have caused consumers to assume there was an association between GAME and Kangaroo.”

Similarity of marks: GAME argued that the relevant comparison was between the pictures on Kangaroo’s box to GAME’s marks, but there were distinct differences in the ducks wearing glasses.  “Some” similarity, slightly favoring GAME.  [If the court had been more rigorous about the scope of the image registration, it seems likely to have found less similarity.]

Actual confusion: no evidence, favoring Kangaroo.

Marketing channels: not very important when both parties use the internet, or more specifically Amazon.

Degree of care: low, favoring GAME.

Intent: Sigh.  There was “no question that Kangaroo made some visible changes to its duck in an apparent attempt to avoid copyright infringement. In the end, however, Kangaroo knowingly used marks similar to GAME’s in an attempt to capitalize on what was already popular. This factor supports GAME.”  So here the court, conflicting with its analysis of strength of the mark, presumes that GAME’s rights extend to the product design—but doesn’t ask whether there’s nonfunctionality or secondary meaning—by equating making a competing product, and showing that product on the box, with “use” of a “mark.”  I see nothing on the box that looks like GAME’s registered mark.

Likelihood of expansion: irrelevant.

Though counting factors favored GAME, that’s not how this game is played.  Evaluating the factors as
a whole, and in light of all the other evidence, GAME didn’t show likely confusion as opposed to possible confusion.

GAME also argued unfair competition under Arizona law, apparently finding Kangaroo’s copying “unfair.”  As Mark Lemley says, lots of businesses firmly believe that the phrase “unfair competition” is redundant.  But Arizona looks for consumer deception as the core of unfair competition. “Though there was evidence of Kangaroo’s clear intent to capitalize on the popularity of the Derby Duck, the Court would need evidence of how the public was being cheated or deceived to conclude Kangaroo’s competitive behavior was improper.” It was possible that the original Amazon listing of Kangaroo’s float was “designed … to capitalize on GAME’s own success,” which might entitle GAME to relief, if, for example, the listing “made representations that the two floats were manufactured by the same company or if the Amazon listing contained pictures of the Derby Duck but Kangaroo then delivered its own duck.”

Friday, July 19, 2019

Lysol can't quickly clean up this mess of anti-Clorox ads

Clorox Co. v. Reckitt Benckiser Gp. PLC, 2019 WL 3068322, No. 19-cv-01452-EMC (N.D. Cal. Jul. 12, 2019)

Clorox sued Reckitt for false advertising of its Lysol cleaning products under the Lanham Act and California’s UCL/FAL. The court found tiny parts of the complaint insufficiently pled but kept most of the claims intact.

First, the court determined that Rule 9(b) applied to the false advertising claim, as to the California claims, because intentional misrepresentation was alleged.

Next, Reckitt argued that all Clorox’s misleadingness claims failed because the complaint didn’t allege specific facts proving significant consumer deception.  But proof is for summary judgment/trial, not the pleadings. “[A]t the pleading stage the plaintiff need only allege specific misleading statements and explain why they are misleading in accordance with Rule 9(b).”

On to specifics: Ads: (1)“Bleach Indicator Test” depicting a side-by-side test of Clorox Clean Up and Lysol Daily Cleanser.. One cutting board is first cleaned with Clorox Clean Up and another cleaned with Lysol Daily Cleanser, then an apple slice is placed on each cutting board; the former turns brown and the latter doesn’t. Four individuals labeled as “real people” negatively react to the browned apple, e.g., “I wouldn’t even want to touch this.” Voice-over: “unlike Clorox Clean Up, Lysol Daily Cleanser has only three simple ingredients and leaves surfaces free from harsh chemical residue.” A similar ad used a “bleach indicator test” instead.

This was sufficiently alleged to be false for three reasons: (1) It plausibly necessarily implied that Clorox Clean Up was unsuitable or unsafe for use in kitchens, even though the EPA has in fact deemed the product safe for kitchen use. “[A]n advertisement can be literally false where it necessarily implies to customers that a product is unsafe to consume.” Given the images of food turned brown and people recoiling in disgust, it was reasonable to infer falsity by necessary implication. 

(2) It plausibly falsely indicated that the result of the test depicted—that Lysol Daily Cleanser apparently leaves no residue that would affect an apple slice—was inaccurate. According to Clorox, Lysol Daily Cleanser contains hypochlorous acid, “a form of bleach,” so a “properly chosen and calibrated ‘bleach indicator test’ would detect the residue left by Reckitt’s product,” but Reckitt’s chosen test was deliberately designed not to do so. A “tests prove” claim is false where the tests “are not sufficiently reliable to permit one to conclude with reasonable certainty that they established the claim made.” Clorox plausibly alleged that Reckitt’s test is not sufficiently reliable to permit one to conclude with reasonable certainty that Lysol Daily Cleanser leaves no bleach residue.  (Note the elision of the key question here: what exactly does the ad claim that “tests prove”?  The ad doesn’t explicitly say there’s bleach on one slice and not on the other.)

(3) It was literally false because it necessarily implied that Lysol Daily Cleanser and Clorox Clean Up are comparable products but that the Clorox product leaves a harsh residue. But they have different formulations and purposes. “Although usable in kitchens, Clorox Clean Up is a heavier duty product than Lysol Daily Cleanser” with stronger ingredients not for everyday use, so attempts to “position Lysol Daily Cleanser as a ‘simpler’ or ‘less harsh’ substitute for CCU misrepresents the facts and deceives customers.”  [Gotta admit, less harsh sounds true but also necessarily misleadingly comparative, given the background expectation that a thing will be compared with a thing in its class, e.g., what are the harshest daily cleaners? Clorox alleged that it did market an actually competing product, which makes the misinterpretation even more likely.] LDC couldn’t be substituted for CCU because the former was much more diluted and lacked a surfactant/detergent for intensive cleaning. [This seems eminently correct as to indications but possibly not descriptively true—I might want to know how many consumers are unaware of the difference.] Apples-to-oranges comparisons can be literally false by necessary implication “where non-comparable products are portrayed as otherwise equivalent (except for the superior or inferior aspect being illustrated in the advertisement).” Thus, “plaintiffs can establish literal falsity under the Lanham Act by alleging that two products portrayed as comparable in an advertisement are not actually comparable – that the advertisement omits differences which would have been material to recipients.”  Clorox sufficiently alleged lack of comparability, especially given the availability of a closer Clorox comparator.

Reckitt argued that Clorox Clean Up was in fact comparable to Lysol Daily Cleanser because the EPA has approved the Clorox Clean Up as “Gentle & Powerful Enough for Daily Use,” but there was no authority holding that the EPA’s categorization of products makes those products comparable for Lanham Act purposes. Anyway, this was a factual dispute.

(2) “Spray Away” ads showing an image of Clorox Clean Up and its list of ingredients being sprayed and wiped away with Lysol Daily Cleanser. The ad then flashes banners stating: “Lysol Daily Cleanser[;] Only 3 ingredients,” “Kills 99.9% of germs (when used as directed),” and “No harsh chemical residue.” A Facebook ad juxtaposes the safety warnings of Clorox Clean Up and Lysol Daily Cleanser and concludes with the same statement.  Also sufficiently alleged falsity.

First, this was another plausibly apples-to-oranges comparison of LDC with CCU. Second, the Facebook ad juxtaposing the safety warnings was plausibly likely to mislead consumers because it suggests that the Lysol product is “simpler” and has “fewer safety risks” and “impugns the safety of CCU by suggesting that consumers should shy away from products that require cautionary disclosures.” Clorox also alleged that the active ingredient in the Lysol product, hypochlorous acid, was no gentler than the bleach in Clorox Clean Up.

 (3) “Fake It,” “Game Over,” and “Spray Away” ads: the first said that Lysol could “help protect” children from colds then showed a split screen with the Clorox and Lysol symbols on either side, and “germs” on both sides of the screen; the germs on the Lysol side of the screen disappear while those on the Clorox side remain. An announcer states, “Lysol Disinfectant Spray kills the number one cause of the cold and Clorox Wipes don’t.” Reckitt eventually added in “minuscule type” that the comparison was between Clorox Disinfecting Wipes and Lysol Disinfecting Spray. Two other ads had the same factual claims, presented differently (in one, a container of Clorox Disinfecting Wipes is sprayed off the screen by Lysol Spray).

Plausibly alleged to be literally false by necessary implication. Clorox again alleged an apples-to-oranges comparison of Clorox’s “pre-moistened, anti-microbial wipes that consumers use to clean and disinfect surfaces throughout the home” to a Lysol product in a different category with different usage instructions. Wipes are allegedly formulated to target different germs than disinfecting sprays. “The key difference is between wipes and sprays, not Clorox and Lysol.” Again, Clorox alleged that more comparable products were available—both parties’ sprays (neither of which are approved for rhinovirus) or their wipes (both of which are).

(4) “Strength Test” ads: Employed to pick up kettlebell weights, the Clorox wipe rips immediately while the Lysol wipes holds the weight for several seconds. A disclaimer states, “Dramatization. Based on lab results. Supervised demonstration. Do not attempt.” A Facebook ad said, “Lysol wipes are stronger than competition” and depicted a Lysol wipe intact next to a torn “competitive” wipe that “appears below a version of the famous Clorox chevron, in which the Clorox brand name has been replaced with the words ‘vs leading competitor.’ ”

Clorox’s claim that the ad falsely insinuates that Lysol wipes are “of higher quality, are more durable, and are more resistant to tearing during use than Clorox wipes” failed because Clorox didn’t allege that Lysol wipes are not of higher quality, more durable, and more resistant to tearing than Clorox. [Technically, it should be enough to allege that they are of equal quality—one might even hedge and allege that Clorox wipes are of at least equal quality to Lysol’s.] It wasn’t enough to allege that the Clorox wipes are unlikely to rip under typical use conditions.

However, the court was more receptive to the allegation that the “strength test” conducted in the advertisement was unreliable and therefore literally false. Clorox alleged that the test “is not capable of replication, because neither product is actually long enough to serve as a ‘handle’ when holding a kettlebell weight,” and thus it wasn’t “sufficiently reliable to permit one to conclude with reasonable certainty that [it] established the claim made.” This was more than the insufficient allegation “there was simply no way a valid test would show” results supporting an advertising claim.

(5) “No Scrubbing” ads: for example, a woman squirts Lysol Power Toilet Bowl Cleaner into a toilet and flushes; the toilet bowl instantly becomes clean without the use of a brush. The ad then depicts the unfavorable results of a side-by-side efficacy test comparing Lysol Power Toilet Bowl Cleaner and Clorox Regular Liquid Bleach. A small disclaimer states, “Cleaning Power vs. Clorox Regular Liquid Bleach on limescale and rust stains. Results after contact with product for 10 minutes, followed by rinsing.” A small banner states, “10X more cleaning power than Clorox.”  In another similar ad, a tiny disclaimer states that the results involve Lysol Power Toilet Bowl Cleaner and Clorox Toilet Bowl Cleaner Clinging Bleach Gel, but that’s is a distinct product from the “Clorox Toilet Bowl Cleaner with Bleach” product referenced in the voice-over.  The “10X More Cleaning Power than Bleach” claim also appears in stores.

Clorox pled falsity: (1) Again, apples-to-oranges: Clorox alleged that the formulation and purpose of the two products differ.  [I just love what you learn about the world in false advertising cases.]  Acid-based cleaners, such as Lysol Power Toilet Bowl Cleaner, are more effective against mineral-based deposits (like rust and limescale), whereas Clorox’s bleach-based Clorox Toilet Bowl Cleaner is more effective at removing organic stains (like mildew and mold). Again, the parties allegedly marketed more directly competing products. Again, Reckitt’s argument that the EPA approved both for use on mineral-based deposits wasn’t sufficient.

Reckitt argued that it added a “disclaimer expressly stat[ing] that the purported advantage relates only to rust and limescale and not to organic matter.” Clorox alleged that the disclaimers were “nearly illegible” and “minuscule” and thus plausibly useless.

Second, Clorox plausibly alleged misleadingness: “[t]hrough its depiction of a woman using a single squirt of the product to render her toilet immaculate,...[the ad indicates that] the Lysol product works instantly to removal all deposits from toilets.” First, “the product requires at least 10 minutes to remove some toilet bowl stains,” and second, it’s not [as] good at organic deposits, so it “cannot render toilets immaculate in seconds, as depicted in Reckitt’s advertising.”

Third, Clorox plausibly alleged that the claim “10X more cleaning power than Clorox” was literally false because Lysol products generally do not have a performance advantage over Clorox. Compared apples to apples, the Lysol product allegedly didn’t have an advantage in removing limescale and rust because they contain the same active ingredient, glycolic acid. So too with the claim “10X More Cleaning Power than Bleach,” because a reasonable consumer would likely believe that the comparison is in fact with its leading competitor, Clorox.

(6) Noncomparative ads: claims included: kills “99.9% of germs”; “kills over 100 illnesses causing germs” and a disclaimer that “Lysol Disinfecting Spray kills germs on hard surfaces when used as directed.”  One ad was ambiguous as to whether the ad was claiming that both touted products could
kill over 100 illness-causing germs, or whether they can do so together.  But it was plausible that it misleadingly implied that either product alone would be enough. Another ad claimed that Lysol Daily Cleanser kills “99.9% of germs” and the visual showed an actor spraying and immediately wiping the surface, whereas the EPA-approved use instructions on the label requires ten minutes of contact with a treated surface to achieve its disinfectant effect. That was plausibly misleading, though it wasn’t a comparison to Clorox.

Materiality: the court quoted precedent that materiality “is ‘typically’ proven through consumer surveys,” even though that is empirically false (this is a problem for the courts of appeal; the court here notes but does not give a reason for the shift in judicial treatment of materiality over time, from presuming materiality for literal falsity—often a matter of common sense—to a seemingly rigid insistence on separate evidence no matter what). Restoring some flexibility, a plaintiff can also establish materiality by showing that “the defendants misrepresented an inherent quality or characteristic of the product.” Clorox plausibly alleged that Reckitt’s advertisements attack Clorox products’ efficacy, safety, and durability. These were inherent qualities and characteristics of cleaning products, and would likely influence the purchasing decision of a consumer.

Injury: Clorox alleged direct diversion of sales and damage to its goodwill.  Reckitt argued that wasn’t enough, but for a competitor who’d been directly attacked it definitely was. In Vincent v. Utah Plastic Surgery Soc., 621 F. App’x 546 (10th Cir. 2015), the Tenth Circuit required the plaintiff to make some showing of “how much Plaintiff’s profits have decreased since Defendants began their advertising campaign,” to “quantif[y] or estimate the decreased in goodwill,” or to “quantify the number of potential customers who allegedly have been lost because of Defendant’s statements,” but the court wasn’t going to do that in the Ninth Circuit.

UCL/FAL: Reckitt argued that Clorox needed to allege its own reliance on Reckitt’s ads to state UCL/FAL claims.  That’s true for the FAL and UCL “unlawful,” but not for UCL “unfair.”  Also, whether the ads would deceive reasonable consumers was a fact question, as it usually is.

Monster Energy can't show falsity, can show tortious interference (but not irreparable injury)

The court denied a preliminary injunction on Monster’s claim that Vital falsely advertised its “Super Creatine” as “creatine,” because there wasn’t sufficient evidence that the two were distinct (in meaning or more significantly in function), and on tortious interference for lack of a showing of irreparable harm.

Monster argued that using “creatine” on the labels of Vital’s energy drink BANG (as part of a promise of “Creatine, Caffeine, CoQ10, & BCAAs”) was literally false, because BANG does not contain creatine, and that “Super Creatine” was impliedly false because BANG actually contains an entirely different molecule, creatyl-L-leucine.

Monster’s expert tested four cans and found no creatine, or only trace amounts, in the products.  Vital’s principal also made public statements that the products didn’t contain “regular creatine.” The expert’s declaration stated that “Super Creatine,” Vital’s term for creatyl-L-leucine, was a “chemically synthesized compound” which is created from the linking of two distinct amino acids, creatine and leucine, with properties “distinct from [those of] the constituent amino acids.”

The court found Monster’s definition of “creatine” to be “overly narrow,” since its own cited evidence established that “[m]any forms of creatine exist in the marketplace,” including formulations combining creatine with other amino acids. Monster also argued that creatyl-L-leucine does not provide any of the benefits of creatine, but its evidence did not establish that fact; it supported “only the more general conclusion that the chemical and physical properties of a new substance formed from the combination of two amino acids differs from their constituent parts.” Monster’s cited scientific journal articles didn’t discuss creatyl-L-leucine, “but both state that at least some of common creatine compounds provide similar or superior effects to those provided by creatine alone.”  The burden of proof was on Monster, and it did not meet that burden.

Monster also argued that BANG doesn’t contain enough Super Creatine to provide the benefits that VPX promises consumers. But testing only four cans of a single flavor of BANG purchased from the same retail store in Southern California wasn’t enough to conclude that the results were representative of BANG products generally. “The Court will not order a nationwide recall on the basis of such a limited sample size.”

Intentional interference with contractual relations: Monster showed that it had valid contracts for specific amounts of in-store shelf and/or cooler space with retailers across the country, and also showed that Vital disrupted those agreements, leading to BANG products being stocked in Monster’s contracted-for retail shelving space in retail locations across the country.  This wasn’t a matter of “wayward cans,” given the scope and duration of the problem and documented statements from Vital’s leadership. One former Vital account manager declared that district and regional managers directed him to use “guerilla tactics” and “be aggressive” in order to obtain shelf and cooler space for BANG at retail stores. “They made specific demands about the location in which BANG should be placed … and instructed [him] to document the space he acquired with photographs,” though he knew that competitors had contracts with retailers about placement. There was also evidence that placement contracts were industry custom, and that Vital’s principal made Instagram posts showing intent, such as one that shows an image of a VPX products placed in front of Monster products accompanied by the text “When in doubt block them out. In life when they tell you there’s no shelf space – make your own shelf space! When multibillion-dollar competitors pay for space retaliate with a vengeance,” and another which states that VPX will “not placate to [a retailer’s] tomfoolery and rigged system of paying for shelf space.”

Defendants argued that Monster failed to show that Vital or its agents had knowledge of the existence of the specific shelving-space contracts between Monster and its retailers with which they interfered. The evidence was to the contrary, including public statements made by the principal which object to the industry practice of paying for shelf space and state his intention to “make [his] own shelf space” and “retaliate” against competitors who pay for space. [Ah, clients and their social media.] “In light of the extent of this practice, Plaintiff need not demonstrate specific knowledge of each contract in question in order to demonstrate a likelihood of success on the merits.”  Likewise, the evidence showed that the “wayward” cans in Monster’s shelving space were likely the result of defendants’ intentional conduct.

But there was very little evidence of damages. While it may be the case that BANG’s sales growth has been “fueled by VPX’s theft of Monster’s shelf and cooler space,” Monster didn’t have good evidence backing this up.  There was no evidence connecting contractual interference with “the loss of customer goodwill, the loss of market share, or the loss of profits,” making harm speculative at this stage. So too with irreparable harm.

TrueCar's false claims not subject to car dealers' challenge without evidence of injury

Dependable Sales & Service, Inc. v. Truecar, Inc., 2019 WL 3067115, No. 15-cv-1742 (PKC) (S.D.N.Y. Jul. 12, 2019)

Lots of prior rulings about various aspects of this false advertising claim in the general field of auto sales.

TrueCar successfully moved for partial reconsideration of the previous summary judgment decision holding that the plaintiffs, 108 automobile dealerships, failed to come forward with evidence of economic or reputational injury from TrueCar’s advertising. They weren’t direct competitors and TrueCar’s false advertisements did not make comparative claims, so plaintiffs weren’t entitled to a presumption of injury. Now, the court concluded that without evidence of some injury, disgorgement wasn’t available as a remedy, despite evidence of TrueCar’s willful Lanham Act violations.

There is authority in the Second Circuit for allowing disgorgement to advance the interest of deterrence, even where the plaintiff has not demonstrated injury. However, that line of cases “arose in the trademark and trade dress arena.” It’s worth noting that the statutory language doesn’t make this distinction; Lexmark is an interpretation of the overall structure of Lanham Act liability.  “More recently, in a false-advertising case, the Second Circuit observed that ‘[o]ur precedent permits a district court to award a defendant’s full profits based solely on deterrence,’” Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247, 262 (2d Cir. 2014), but that was a case of obvious direct competition.

Unfortunately, the court went on to say that “[t]here are important differences in the elements of a trademark claim and a false advertising claim, as well as in the interests at stake…. In a trademark case, a plaintiff may be harmed by virtue of losing exclusive control over its own mark…. The unauthorized use of a mark ‘invariably threatens injury to the economic value of the goodwill and reputation” associated with the mark.’ … Even where a trademark plaintiff cannot point to lost sales, it may still be harmed by ‘a loss of control ... over how the public perceives’ its goods or services.” 

As readers of this post likely know, this assumption is both (1) unsound in a number of situations, particularly outside classic source confusion, and (2) increasingly vulnerable post-eBay and Winter, now that courts have given renewed attention to plaintiffs’ harm stories.  Of course, it would be reasonable to respond that even without a presumption of irreparable harm, a presumption of harm is still justified … but the lost control language is very tightly tied to the discourse of irreparability.  As a few cases (mostly in the 9th Circuit) have recognized, the existence of some unquantified risk of harm (“may still be harmed”) is not the same thing as the likelihood that the harm will materialize.  Perhaps the standard for disgorgement ought to cover any [reasonable? theoretical? plausible? nontrivial? you see the difficulty] risk whether likely or not—I suspect that the level of willfulness might interact with one’s opinion on the matter.

Anyway, in a trademark case, the Second Circuit concluded that the district court should have ordered disgorgement solely to deter willful infringement because the “deliberate[ ] and fraudulent[ ]” infringement of plaintiff’s mark warranted disgorgement of defendant’s full profits, even though plaintiff did not demonstrate lost sales, consumer confusion or damage to good will. Defendant’s “callous disregard for the rights of a competitor” was sufficient. [As opposed to callous disregard for consumers and competition in general through willful false advertising—note too that trademark infringement in a non-sales substitution case wouldn’t come under this reasoning if we take “competitor” seriously, which would actually be a decent way of reconciling the cases.] But a false advertising plaintiff must show injury “by way of lost sales or damage to business reputation,” though a presumption of injury can arise from falsity about a direct competitor.  [The real problem here is that the trademark cases cited largely predate, and definitely have have not actually analyzed, Lexmark and its statutory interpretation. I’m not saying the court is definitely wrong in its holding here—though I might have gone the other way—but I am saying that the efforts to distinguish trademark law are not successful.]

Ultimately, the court reasoned, “[i]t may seem anomalous that a false advertiser in need of deterrence can escape the disgorgement of profits when there are plaintiffs that are eager and willing to pursue that remedy,” but the plaintiffs here didn’t show injury. A differently situated plaintiff [would it have to be an entity that used TrueCar’s business model of contracting with different dealers and offering discounts? It’s not obvious why the false advertising here would’ve hurt them either] might have damages that are small or difficult to establish, and for them disgorgement would be an ideal remedy. Consumer class actions [unless consumers signed arbitration agreements] or the FTC/state AGs are other options for punishing willful false advertising.  

The court declined to exercise supplemental jurisdiction over the remaining state law claims.

Reading list: the dark side of meme culture

I realized that many of the young reporters who initially helped amplify the white nationalist “alt right” by pointing and laughing at them, had all come up in and around internet culture-type circles. They may not have been trolls themselves, but their familiarity with trolling subculture, and experience with precisely the kind of discordant swirl featured in the aforementioned early-2000s image dump, perfectly prepped them for pro-Trump shitposting. They knew what this was. This was just trolls being trolls. This was just 4chan being 4chan. This was just the internet. Those Swastikas didn’t mean anything. They recognized the clothes the wolf was wearing, I argued, and so they didn’t recognize the wolf.
This was how the wolf operated: by exploiting the fact that so many (white) people have been trained not to take the things that happen on the internet very seriously. They operated by laundering hate into the mainstream through “ironically” racist memes, then using all that laughter as a radicalization and recruitment tool.

Thursday, July 11, 2019

Imaginative makeup color names as descriptive fair use

Hard Candy, LLC v. Anastasia Beverly Hills, Inc., 921 F.3d 1343 (11th Cir. 2019)

Hard Candy sued Anastasia, a competitor in the cosmetics industry, for infringement based on one of Anastasia’s “Glow Kits,” flip-open makeup palettes containing four different shades of facial highlighter.  The Gleam Glow Kit included the words “hard candy” in capital letters on the back and inside of the package to designate a peach-pink shade of makeup. “Anastasia says that it chose this name because the product had a ‘shimmer’ that reminded the developer of candies that her grandmother gave her when she was young.” “Hard candy” appeared in marketing materials and social media posts, as well as on the product itself.
front and back of kit


Hard Candy sought “every remedy permitted by the Lanham Act besides actual damages -- that is, it asked for an injunction to prevent future infringement, an accounting and the disgorgement of profits that the defendant made from the allegedly infringing goods, and declaratory relief, along with fees and costs.” The district court denied it a jury trial, held a bench trial, and found no likely confusion/descriptive fair use, and the court of appeals affirmed.

There was no Seventh Amendment right to a jury trial.  Hard Candy argued that it should have gotten a jury because it was seeking to recover Anastasia’s profits as a “proxy” for the damages it suffered due to infringement. Doesn’t matter; disgorgement is still an equitable remedy and doesn’t entitle the claimant to a jury trial.

The standard of review of the confusion finding after a bench trial was for clear error.  Factors that favored Hard Candy: product similarity, trade channel/customer/advertising similarity, and strength of mark (arbitrary and therefore strong). Note that “Hard Candy” was arbitrary for cosmetics generally—or at least, could be used in arbitrary fashion.  Factors that favored Anastasia: dissimilarity of marks/uses and lack of evidence of actual confusion.  The court also found no intent to infringe.

Hard Candy argued that the district court erred by finding that the “similarity of mark” factor favored Anastasia, since the words were identical. But it’s the overall impression that matters, and “formally” identical use of the same letters wasn’t enough. The manner of use matters too.  In the Gleam Glow Kit, the words HARD CANDY” appeared only on the back and inside of the kit, “nam[ing] one shade of a product that is otherwise clearly and prominently featured as an Anastasia Beverly Hills mark.”  It was not clear error to weigh descriptive use, or lack of use as a mark, as favoring Anastasia.  [Despite what the Supreme Court said, this case highlights—no pun intended—that descriptive use just doesn’t work any more as a separate defense.  On the flip side, even if we’ve abandoned use as a mark as an independent limit on infringement, that doesn’t mean it’s not relevant to whether confusion is likely.]  Mark placement, size, and use to identify a specific part of the product are definitely relevant to a similarity analysis.

Finally also argued that the district court placed too much weight on the lack of a showing of actual confusion. But, “[i]f consumers have been exposed to two allegedly similar trademarks in the marketplace for an adequate period of time and no actual confusion is detected either by survey or in actual reported instances of confusion, that can be powerful indication that the junior trademark does not cause a meaningful likelihood of confusion.” Here, Anastasia sold almost 250,000 Gleam Glow Kits; the product was touted on social media accounts with millions of followers.  “In this case, there was enough opportunity for confusion to make the absence of any evidence significant. … [H]undreds of thousands of cosmetics consumers purchased the allegedly infringing kit, several times more likely saw it on store shelves or online, and still there is no evidence that anyone, anywhere, was ever confused about whether Anastasia or Hard Candy was responsible for the product.” At a minimum, there was no clear error in weighing this in favor of Anastasia.

Anyway, Anastasia established descriptive fair use. The court of appeals endorsed the view that “it is not necessary that a descriptive term depict the [product] itself, but only that the term refer to a characteristic of the [product].”  And here’s an interesting bit that the court of appeals doesn’t even seem to notice: the use of Hard Candy as the name of the cosmetics brand was arbitrary, but the use of “hard candy” as the name of a specific color was descriptive.  I think this is the right result (though I might’ve called the brand name suggestive), but this case is pretty good evidence that manner of use matters a lot to whether something seems “inherently” to be a trademark. See also Thomas R. Lee, Eric D. DeRosia & Glenn L. Christensen, An Empirical and Consumer Psychology Analysis of Trademark Distinctiveness, 41 ARIZ. ST. L.J. 1033 (2009). 

Hard Candy argued that Anastasia’s use wasn’t descriptive, and that the district court disregarded “the central requirement” of consumer perception of the use.  But the district court did consider how a hypothetical consumer would perceive the use, considering “the overall context; the lettering, the type, the style, the size, [and] the visual placement” of the words on the product.  Anastasia also introduced evidence that cosmetics companies regularly describe shades with words that are not literal color descriptions, like the other three shades in the kit named “Starburst,” “Mimosa,” and “Crushed Pearl.”  This common practice was relevant to reasonable consumers’ perceptions of the use, not just to Anastasia’s subjective intent.  And no evidence of actual consumer perception is required to use the defense.

When © trips courts up: Lack of access to standards makes false ad claim impossible to resolve

Wing Enterprises, Inc. v. Tricam Industries, Inc., 2019 WL 2994465, No. 17-cv-1769 (ECT/ECW) (D. Minn. Jul. 9, 2019)

This false advertising case about multi-position ladders turns out to involve an important copyright issue that the Supreme Court has taken up: when a standard is incorporated into law, should it be readily accessible to the public? Because an older ANSI standard incorporated into OSHA isn’t available to the court, the court can’t resolve whether failure to meet the current ANSI standard also violates OSHA. This matters because the defendant advertised ANSI/OSHA compliance, but plaintiff’s evidence went to whether there was compliance with current ANSI.

The thrust of the federal and state false advertising claims claims is that Tricam represented that its Gorilla Ladders comply with ANSI ASC A14.2, a voluntary industry standard for portable metal ladders that was developed by the American Ladder Institute, but in fact the rungs of its ladders are not sufficiently deep all the way across to satisfy that standard as Wing understands it.  The label affixed to each ladder has an oval icon that says: “manufacturer certifies conformance to OSHA ANSI A14.2 code for metal ladders” and there were similar representations elsewhere.

The court admitted one expert on ANSI conformance and excluded an expert report on materiality, the latter because of the access-to-code problem.  Wing’s survey expert, Hal Poret, conducted materiality surveys: a labeling survey, intended to measure consumer reaction to the allegedly false statement on the label, and an importance survey, intended to assess the importance to consumers of compliance with industry safety standards in general. First, the court rejected the argument that the labeling survey was unreliable because it failed to replicate market conditions; it highlighted the label and demanded consumers spend a certain amount of time looking at it, which might not happen on the retail floor.  “These might be fair points if the survey had been intended to test what message the statements conveyed (as relevant to the falsity element), or whether consumer confusion existed in a trademark case.” But for a materiality study, how the consumers would see the image in the store didn’t affect its relevance, although a jury could weigh divergence from the retail context in its considerations.

The real problem is that Poret’s surveys tested ANSI and OSHA conformance together by eliminating the entire challenged label (and his importance survey referred only to conformance to unspecified “industry safety standards,” not specifically to ANSI); Wing didn’t show that either a combined OSHA/ANSI statement or industry safety standards writ large was relevant to the issues a jury would need to decide in this litigation.

Wing argued that OSHA uses ANSI standards, so that a violation of ANSI is necessarily a violation of OSHA.  And here’s where the access part comes in.  OSHA regulations provide that mandatory provisions (“shall” provisions) of standards incorporated by reference are adopted as mandatory under OSHA and “have the same force and effect” whether they are issued by federal agencies or by nongovernmental organizations. Here, OSHA regulations incorporate by reference “ANSI A14.2-56 Safety Code for Portable Metal Ladders, Supplemented by ANSI A14.2a-77.”

Those last two digits are apparently pre-2000 year codes.  Wing didn’t identify how -56 and -77 differed/overlapped with the 2007 version of ANSI A14.2 the parties were apparently working from in this case.  OSHA regulations, in fact, incorporate by reference different versions of ANSI A14.2. “For example, one regulation that pertains to the construction industry incorporates the 1982 version; another, pertaining to shipyards, incorporates the 1972 version; and others, relating to marine terminals and longshoring, incorporate the 1990 version.”  Wing didn’t confirm whether there was any relevant variation, and “[e]ven if the Court were inclined to do that legwork on Wing’s behalf, the Court cannot independently verify the extent to which the 1956 version explicitly mentioned in the regulations overlaps, if at all, with the 2007 version before the Court by referencing publicly available sources because the ANSI standards are not reproduced in the Code of Federal Regulations and are instead behind a paywall or available for in-person review in another state.” [Apparently the “state” is DC, at the National Archives.]  Testimony from Tricam witnesses was not sufficient to reach the legal conclusion that failure to meet the current ANSI standard, in the manner identified, would also be failure to meet the older standards that actually have the force of law.

Because Poret’s label survey was premised on the assumption that ANSI falsity meant OSHA falsity, it couldn’t test ANSI falsity alone and was not admissible. Likewise, his importance survey tested “[c]ompliance with industry safety standards” in general, but given the multiple sources of industry safety standards and the evidence in this case, that wasn’t relevant—“What happens if, as contemplated above, a ladder that fails to conform to the 2007 version of ANSI nonetheless does meet the requirements of one or more OSHA regulations that incorporate an older version of that standard?”

Without the survey, Wing couldn’t show materiality and summary judgment was warranted. It argued that it could show materiality by showing that “the false or misleading statement relates to an ‘inherent quality or characteristic’ of the product,” and that “questions of safety and efficacy are likely to satisfy automatically the materiality prong.” But the Eighth Circuit has not endorsed the “inherent quality or characteristic” method of showing materiality. And here, without further evidence on ANSI variation, “the most Wing could show is a technical noncompliance with one of multiple potentially applicable safety standards. That is not a compelling context in which to adopt a new approach to showing materiality.”

Nor was the following adequate: (1) testimony from a high-level Wing executive that, in his opinion, compliance statements on Home Depot’s website are “important, otherwise, I don’t believe Home Depot would put it on the website,” (2) testimony by Tricam’s president that an ANSI-certification statement on Home Depot’s website “could be” helpful in differentiating Tricam’s products from hypothetical competing ladders that do not purport to conform to ANSI, and suggesting that an ANSI-certification statement on the product label might be something a professional might want for purposes of OSHA inspections of a job site, and (3) testimony from the chairman of the ANSI labeling committee that “[i]t’s possible” that an ANSI-compliance statement would help a consumer choose a ladder. But these statements were all speculative on their face, and in each case the testimony was qualified by reference to the speaker’s lack of direct knowledge about consumer behavior.

Wednesday, July 10, 2019

Competitor's false advertising case against MLM income claims can proceed

Youngevity Int’l v. Smith, No. 16-CV-704-BTM-JLB, 2019 WL 2918161 (S.D. Cal. Jul. 5, 2019)

This Lanham Act case involves, among other things, alleged misrepresentations relating to the MLM aspects of defendants’ business pitched to potential “affiliates.” 

First, defendants argued that plaintiffs failed to establish any damages, justifying summary judgment. But there was some evidence of decreased Youngevity sales during defendants’ false advertising and an expert willing to link that with defendants’ sales generated by ex-Youngevity distributors; also, “an inability to show actual damages does not alone preclude a recovery under section 1117 [of the Lanham Act],” and plaintiffs were also seeking injunctive relief. 

Second, defendants argued that they couldn’t be held liable for statements made by their distributors. There was sufficient evidence for a jury to find that these people (known as Wakaya Ambassadors) were agents for Lanham Act purposes, making defendants vicariously liable.  Their classification as independent contractors in Wakaya’s own Policies and Procedures wasn’t enough to avoid a material issue of fact.  Moreover, defendants didn’t dispute that the Ambassadors “engaged in the allegedly false advertising for the purpose of attracting distributors and increasing sales,” squarely within the scope of their roles. And defendants reserve the right to terminate Ambassadors’ accounts for unapproved conduct. That was enough to go to the jury.

The false advertising claims included allegedly false claims about the potential income of a typical Wakaya distributor, e.g., Wakaya Ambassadors can earn “$6,200 bucks residually in the next three to six months” and “[w]e plan to build several leaders to 10K a month in the next 6 months.” [Ugh. It’s so clear that the US lacks sufficient protections against pyramid schemes. We shouldn’t be relying on competitors to do this, especially not competitors that are themselves MLMs with their own dubious claims.]  One individual defendant (Vaughn) claimed, on behalf of the company, that “when—you get a thousand people joining [Wakaya] a day, that’s $85,000 in a day. If you wanna do it in a week, that’s $85,000 in a week. [Etc.]”  Smith, Wakaya’s owner, observed in deposition that the statement is “inaccurate” because “it claims that Wakaya Perfection pays income for the joining of new people, for new people joining the organization.” Smith also testified that he could not recall any distributor in Wakaya ever making $85,000 in a month and that Vaughn himself does not make $8,500 in a week based on his work as a Wakaya distributor. There was evidence that Vaughn repeatedly asserted that Wakaya Ambassadors could earn a million dollars in their first year. Smith himself stated, “I’m telling you right now you’re going to earn a lot of money....[T]he amount[s] of money you’re going to earn in this program...right now you won’t even be able to imagine. They’re almost incalculable.” There was evidence that other Wakaya distributors also made false statements: one claimed that he was making up to $1700 in one day, then testified that, in fact, he made less than $550 in any single month. Expert evidence showed that, in reality, about 1% of Wakaya’s active associates earn $1000 per month in commissions and less than 3% even earn $500 per month.  There was [at a minimum] a genuine issue of material fact on falsity.

Defendants argued that these claims didn’t relate to Lanham Act-covered “commercial activities,” but of course they did. As the Tenth Circuit has said, “[i]t is [ ] apparent, in the context of the Act’s broad purpose of proscribing unfair competition and the 1988 amendment of § 43(a), that Congress did not intend to narrowly limit the term ‘commercial activities,’ but rather intended to encompass those activities which do not solely involve the provision of services or the production of goods. Proctor & Gamble Co. v. Haugen, 222 F.3d 1262 (10th Cir. 2000). Here, “[a]ttracting distributors is at the core of Defendants’ business model and is a practice with a substantial impact affecting commerce.”

The income claims here were literally false, either on their face or by necessary implication; materiality and misleadingness could be presumed:

The claims are specific, conclusive assertions that a Wakaya distributor will make at least the income that in reality, only 1% of distributors make. Even Defendant Smith’s statement, while not stating a particular dollar value, implies that earning a large amount of income as a Wakaya distributor is an inevitability. Moreover, because the claims are highly specific and present the likelihood of earning unrealistic amounts of money as a foregone conclusion when becoming a Wakaya distributor, the income claims are far outside the scope of mere puffery or opinion.

The relevant consumers were “anyone who might be convinced to become a Wakaya Ambassador based on claims of earning potential above a certain threshold,” and the relevant purchasing decision was to become an Ambassador—which after all, is how defendants make their money.

However, Youngevity’s [rather chutzpadik] argument that Wakaya is an unlawful pyramid scheme was not separately actionable under the Lanham Act, even if operating a pyramid scheme fraud under federal antifraud law. False income claims alone didn’t show that the “rewards” or income that Wakaya Ambassadors received were unrelated to the sale of Wakaya products.

Another alleged falsehood involved the role of alleged billionaire/Fiji Water founder David Gilmour, who Wakaya advertising touted as the founder, owner, and CEO.  The ownership/CEO claims were concededly literally false, and the depositions indicated that Smith was the founder.  Yet “Defendants persist in claiming that Mr. Gilmour founded Wakaya Perfection,” including by claiming that he was an investor (though apparently not in the company itself, but in the island named Wakaya from which some Wakaya ingredients come). The court found that Wakaya’s [implausible] colloquial or symbolic use of “founder” “to refer to one who acts as a kind of figurehead of a venture or project” could be literally false, and there was also evidence that it was likely to mislead consumers, making summary judgment for defendants inappropriate.

However, Youngevity’s claim that Wakaya and its Ambassadors made false claims about the status of Youngevity’s finances failed for want of sufficient evidence; one email written as personal correspondence between associates wasn’t enough to be commercial advertising or promotion.  Two other emails didn’t themselves make negative statements “but rather discuss disparaging communication that the authors allegedly heard about or were on the receiving end of,” which also failed to show sufficient dissemination.

One social media post by “Dave and Barb Pitcock with Wakaya” “certainly disparages Youngevity” but didn’t falsely advertise Youngevity’s financial status. Instead, it described issues the Pitcocks claim they experienced with Youngevity and attempts to explain Youngevity’s alleged behavior by stating, “perhaps [Youngevity] desperately need[s] money.” “While the post does operate to promote Wakaya, it is personal in nature as griping by disgruntled former employees and does not amount to an advertisement about Youngevity’s finances.”

Finally, a former distributor declared that, “[A]fter I joined Wakaya, Barb Pitcock told me in approximately June 2016 on the telephone that Youngevity was struggling financially and would go out of business.” But the distributor had already ended her involvement with Youngevity and became a Wakaya distributor, so that wasn’t a commercial advertisement.

False claims of the origin of Wakaya products: Wakaya’s YouTube page claimed that “Wakaya Perfection is a suite of wellness products by David H. Gilmour, the founder of Fiji water. The uniquely organic products are hand cultivated on the pristine island of Wakaya and made of 100 percent certified organic ginger powder and Dilo oil.”  Smith testified that while this description was accurate when it was first written, it became “untrue” or “not fully accurate” after Wakaya Perfection, LLC acquired the YouTube page and introduced products that included ingredients not sourced from the island of Wakaya. This was enough to create a genuine issue of material fact on literal falsity.

False advertising with respect to safety and health benefits: Wakaya claims that its clay product has “well known benefits,” “may remove toxins from the body,” and is “known” to “neutralize and balance acidic conditions,” “relieve digestion,” and “boost the immune system,” among other benefits. Youngevity’s expert reports that “[t]here is no scientific evidence that would support any therapeutic effects or claims of the consumption of bentonite clays” and that the clay may pose a health hazard because “use of unapproved chelating agents is dangerous and pose a serious risk to human health” and because those who consume the clay may be exposed to unsafe levels of lead and arsenic. This was enough to create a genuine issue of material fact.

Wakaya also advertised that its turmeric product contains six times more curcumin (5.96%) that traditional turmeric (0.92%), but Youngevity’s expert reports identified 2.45% and 3.10% instead via testing, creating a triable issue of fact.  In addition, the only quantitative data supporting the claim to have “a whopping five times more curcumin, the therapeutic agent in turmeric, above all conventional turmeric powders” was based on a test comparing Wakaya’s product with one other brand. Youngevity’s expert tested five other products with ranges from 1.72% to 3.92%.  Wakaya’s rebuttal expert opined that, because levels of organic compounds naturally vary in spices, test results of the percentage of certain compounds in products will also vary, so the testing wasn’t definitive; Wakaya argued that its claims were therefore at best unsubstantiated. [I disagree with this interpretation. There are two facts in evidence, not just one: (1) the percentage in the sample it tested, and (2) that there’s variation, whose range/average deviation is not established—the best understanding of the truth, based on those two facts, is that there is not the claimed percentage in the other lots being sold.  Part of this is an attempt to create epistemological uncertainty: how do we know what’s in any given bottle of a supplement, really? I think the best answer is that you shouldn’t advertise consistency if your own claim is that there’s variation.]  Anyway, the court agreed that the claims were unsubstantiated, but maybe they weren’t false, so Youngevity didn’t get summary judgment on falsity here.

Youngevity also didn’t create a genuine dispute on weight loss: “while the evidence includes testimonials of weight loss during specific periods of time, no promotions or advertising presented by Youngevity promise that users would or will lose weight.”  It’s notable that the FTC would consider these claims to promise that these claims are representative and thus they’d be at least implicitly false, e.g., “So far 100% of People have lost weight on our #Keto #BulaFIT Program” and “While we can’t say that 100% of the people will get results, so far we do have 20 out of 20 that have lost weight.” But Youngevity’s expert report just opined that the claim was “unrealistic, unsubstantiated, and very misleading,” which wasn’t enough under the Lanham Act.  Among other things, the ad claimed weight loss, not that the weight loss would be maintained for any period, and “[c]laims about weight loss are not inherently misleading just because they fail to include data about weight loss maintenance.”